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Eurozone Monetary Policy December 2016

Eurozone: ECB holds rates, extends a smaller QE program to end of 2017

December 8, 2016

The European Central Bank (ECB) decided to extend its quantitative easing (QE) program by nine months at its 8 December meeting, although at a reduced rate of monthly asset purchases. The move is designed to shore up price pressures and avoid tightening financial conditions while economic momentum remains modest. In addition, as widely expected, the Bank decided to hold the refinancing rate, the marginal lending rate and the deposit facility rate steady at 0.00%, 0.25% and minus 0.40%, respectively.

The ECB signaled a continuation of an extremely accommodative stance and stated that the bond-buying program will continue until, “the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” From April 2017 until the end of the year, the program will continue at a monthly pace of USD 60 billion, down from the current USD 80 billion. To accommodate the extension and address the scarcity of eligible assets, the ECB modified the program slightly extending the maturity range and removing the deposit floor constraint.

Overall, the accompanying press conference suggested that the ECB will continue to support the economic recovery and even opened the door for further loosening of monetary conditions in the future. ECB President Mario Draghi stated that, “if, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration.” On top of this, the ECB sees inflation remaining below its target of under, but close to 2% throughout its long term horizon and projects inflation of 1.3% in 2017, 1.5% in 2018 and 1.7% in 2019. Regarding growth, the ECB left its GDP forecasts broadly stable.

While our panelists have divergent views on the ECB’s unorthodox monetary policy decision, there is a strong consensus on the path of interest rates. All of the analysts surveyed by FocusEconomics expect the ECB to keep the policy rate unchanged at the current record-low of 0.00% this year and next.